Following is a synopsis of a recent lecture to New York University Law School students:
I Arrived in China after being in the IT industry for 10 years as an
in-house attorney. Came to work on a project as a legal adviser and
ended up staying because I saw tremendous opportunity in China as well
as in the legal industry.
Since then, I have worked for China’s biggest
companies, the Beijing Olympics, many foreign companies including
Fortune 500 and even advise foreign and Chinese governments. I founded
Caruso and Associates, Chairman at IPG Legal which is our Asia
association and involved as a partner/equity stakeholder in several
other businesses in China.
I could offer a boring academic lecture on Chinese law and the
particulars of the Corporation Law or the Intellectual Property law,
but, I thought it better to share my experiences with the law and the
practice of it over here is developing and quite different than in the
West and the nimble and open minded are the ones who can be successful
in the legal profession in this region.
So, I’ve selected 5 critical things to remember, which you may have
picked up in reading books on China, when/if doing business or advising
clients here in China and I’ll highlight them with my own experiences
and then open up in the end for questions.
1. Nothing is Real in the Jungle
I call this place the Jungle, because it is.
This city of 20m people was literally carved out of Jungle and is in
sub tropical Asia. Everything grows here and it grows fast. It is also
a Jungle because of the laws of nature that seem to apply more than the
laws of man (Western Man that is).
One is constantly amazed at the
things we experience and see and even after ten years and considerable
change, this place is still a Jungle. If you are coming here expecting
it or hoping it can be like the quaint civilized place that you grew up
in Darian Connecticut it is far from it. China, like it predecessors
Japan, Korea and Taiwan does not innovate. They copy.
And like their
predecessors they will one day learn to innovate, but for now they are
the most prolific copiers in the world. Challenge everything here. Do
not take anything at face value, trust no one, trust nothing and when
you finally verify enough to trust, verify some more and at some point
your client won’t want to pay you to verify anymore or won’t think it’s
necessary so make sure you cover your ass.
Some of my favorite copied
and fake items: Fake crab (Yancheng Lake), Fake egg, Fake divorce, Fake ambulance,
Copied Software and Media and of course Copy Salt which is my favorite
because it must actually cost more to make fake salt than the real
Don’t assume that anything or anyone is real and you will protect your reputation and your clients business.
2. File IP Often and Early.
Apple v. Proview.
Proview is a Chinese company that made digital displays. In 2000
Proview filed and received a trademark for Ipad from the State
Intellectual Property Office. As China is a first to file jurisdiction,
the first to file gets the IP, and Apple had not even invented the
Iphone, Proview was the rightful owner in China. Note that Chinese
IP is not widely recognized in other jurisdictions so if you are filing
on behalf of your client, file in China first, then U.S. and then EU.
So in 2006 Apple’s attorneys believed that they had paid $55,000 for
the global rights to Ipad and rejected Proviews offer to sell for $10m
believing that they were covered globally and didn’t need to buy the
Chinese trademark. Hold on a minute. When Apple tried to launch the
IPad in China, Proview, in Bankruptcy, sued Apple and stopped the
distribution and sale of Ipads. Apple and their attorneys countersued
which was a pointless endeavor because they neither had the law on their
side nor did they have the court or the government. In the end they
ended up settling for $60M with Proview not to mention the several
million in legal fees they had to pay and the opportunity costs lost
from the delays, when they simply could have paid $10m and been on their
way in 2006. I had a similar matter with a client. They came with a
great product and a great branding strategy and wanted to bring the
product to China. I advised them that prior to talking to anyone in
China or connected to China that they should at minimum file a trademark
in China which costs about $2,500. Of course they decided that they
were smarter than me and proceeded to talk to several people who they
“trusted” because they were a nephew of a friend, or had studied in
Australia and spoke perfect English, or they went to church with their
neighbor. You can figure out what happened, they later decided to file a
trademark and it was rejected because someone else had already filed it
and this someone else was connected to the person they trusted whom
they then had to buy the trademark from for several hundred thousand
dollars or forgo bringing the product in under the current brand (which
Brand is everything in China).
3. Time is your Client’s Best Ally. Never, ever, be in a Hurry when Negotiating.
I have a client who is a well known high end hotel chain known for
their otherworldly bed. For client confidentiality reasons I won’t
their mention their name. A couple of years ago at one of their
properties here in the Jungle 3 Chinese men walk in and………….
Despite the disruption to a tax paying/employing Jungle resident
(Hotel) the police did nothing – they just wanted it to go away.
The police were the arbitrators – at the Police station.
Under Chinese law, the rioters (family members) should have/could
have been arrested and I demanded that they be arrested and jailed.
Even though it was grueling and I wanted to leave that Police station
as quickly as possible because of their stupidity and circular
reasoning, we waited them out.
They repeatedly pulled my Chinese lawyer into the other room and
asked why she was being unpatriotic and not supporting the Police. She
mentioned Client Advocacy and they ignored her. She wasn’t afraid
because she knows I advise their bosses and they didn’t.
We threatened to call in the media, which pushed them along. The
media came and they were deported, so someone leaked stories to them
this helped as they didn’t like to see their names in the Hong Kong
Finally, after a few days they got tired, the Police got tired, and
we held our ground. They wanted to get back home to their families.
They agreed to a donation from the hotel for the burial costs which was far less than their asking amount.
As much as I wanted to throw my hands in the air and just say, “okay
can we just get this over with”, we waited them out and earned a
favorable result for our client.
4. Expect Anything.
I had a client years ago who wanted to set up a
proper corporate structure in China and begin to export from their
Chinese Foreign Owned Company. The set up for this takes at least 6
months as the maze of bureaucracies one must navigate is insane.
client, a fortune 500 and listed holding company sold their products to
Home Depot, Lowes and others around the world. They had a Taiwanese GM
in China who had been sourcing product from various factories and then
shipping directly to clients like those I mentioned. The CFO in the US
would oversea the payments to suppliers and payments from customers.
The Asian manager who was an American noticed that costs were increasing
and that customer orders had been decreasing and this pattern had
continued for several years. So, they decided that they wanted to get
better control over the process and bring the products to their facility
and ship from their, so they hired me to come in and help them with
I spent about 15 minutes talking to their management and
the Taiwanese snake when I realized that him and the CFO were skimming
money through the purchasing process with local suppliers and that he
had at the same time had his brother set up a factory (within 100 feet
of their new facility) to make the products and sell direct to their
existing customer base.
To make matters worse, the Taiwanese had been
paying off the local government mostly in liquor, meals and prostitutes
and there wasn’t anything they could do about it other than abandon
everything in that town and move far away. This wasn’t the first or
last time this has happened with clients. As a listed company this also
uncovered some serious Foreign Corrupt Practices Act issues for this
client. They chose to keep the status quo and I chose to move on to
5. Chinese Lawyers are Different.
We all know a dozen lawyer jokes
and many of them are true. Lawyers are sharks and can be very
aggressive and can be ambulance chasers etc…. But, there are also many
good lawyers and honorable lawyers and lawyers who take their ethical
obligations and client advocacy obligations very seriously.
has these lawyers. However, the system of being a lawyer in China is
completely different. Firstly, less than 10% of lawyers taking the
lawyers exam each year pass and the exam is very difficult purely
because of the breadth of issues and information that must be
Secondly, and most important the Chinese lawyers obligations
are not to ethical practices or even their client they are first and
foremost to China and the Party. *Remember comment earlier from the Police attacking my lawyers Patriotism.
“I volunteer to become a practicing lawyer of the People’s
Republic of China and promise to faithfully perform the sacred duties of
a legal worker under socialism with Chinese characteristics; to be
faithful to the motherland and the people; to uphold the leadership of
the Chinese Communist Party and the socialist system; to safeguard the
dignity of the constitution and the law.”
There also is not a system for malpractice or disbarment in China
which enables a foreigner to make claims against their Chinese lawyer
and even if you are told there is, it would be impossible to have the
claim heard and for the foreigner to prevail unless the foreigner was a
huge company with huge interests and investment in China.
Early on I was introduced to foreigners who had the rights to
build/sell huge theaters in China and they were negotiating with a
shopping mall owner. I know the actual story because I know the
shopping mall owner and he didn’t know I knew the foreigners.
Foreigners decided to hire a local Chinese lawyer instead of the
American lawyer because they were told the American didn’t know Chinese
law and didn’t understand Chinese culture and he was more expensive.
during negotiations, the foreigners new Chinese lawyer repeatedly met
with the shopping mall lawyers and shared client information on the
negotiations. They agreed with the mall owner to share 3 ways the cost
savings to the mall owner, which was in the millions, unbeknownst to the
foreigners who ended up with a deal they didn’t like but were told by
their lawyer that it was the best he could get.
I don’t think they ever
found out what hit them and even if they did, there wouldn’t have been
anything they could have done.
In order to recover, you must have a contract. Without one your chances of recovery are near zero.
Any contract with a Chinese national must be in English and Chinese.
Be very careful of the Chinese translation as legal Chinese is very
7. Foreign Judgments are Often Not Enforceable in China.
If the Chinese party has assets/companies in Hong Kong, use HK law and their courts.
While the law is important, it is not most important. There are many
other factors such as harmony, and social issues, and the application
of the law, and the education/standing/party relationship of the parties
and lawyers and judges.
I want to thank NYU and Adam Bedzow, the best intern I ever had, for
inviting me today and wish all of you the best of luck with your legal
careers, wherever they may take you.
Presentation by Frank Caruso - Chair of IPG's China Practice Team
IPG is engaged in projects for companies and entrepreneurs doing business in Bangladesh, Cambodia, China, Korea, Laos, Myanmar, the Philippines, Vietnam and the U.S.